Here’s Why the Just Eat-Hungryhouse Merger Spells Trouble for Domino’s

Here’s Why the Just Eat-Hungryhouse Merger Spells Trouble for Domino’s

Here’s Why the Just Eat-Hungryhouse Merger Spells Trouble for Domino’s

The Rising Popularity of Online Food Deliveries

Last year, the delivery sector rose by almost 10% to 599 million UK visits, whereas the total number of visits to UK restaurants rose by just 1%. The merger between Just Eat & Hungryhouse might be at the best time due to the delivery sector’s growing popularity.

Is A Merger Possible?

Hungryhouse and Just Eat are both online food order and delivery services; they act as an intermediary between customers and food outlets. In December 2016, Just Eat announced that it was acquiring Hungryhouse for £200m, subject to a further £40m based on the company’s performance.

The Competition and Markets Authority, CMA, will prohibit this merger if it passes Phase 1 and Phase 2 investigations, which was discussed in an earlier article.

The proposal has passed the Phase 1 investigation in May 2017, and is currently undergoing an in-depth Phase 2 investigation by the CMA. The results will be announced by 2 November 2017.

Is This Acquisition a Good Idea?

Just Eat has been going from strength to strength, after floating on the London Stock Exchange in April 2014, and merging with similar businesses, such as RestauranteWeb, Menulog, Orderit.ca & SkipTheDishes.

Just Eat currently has a database of 27,000+ restaurants in the UK, with 85-95% of UK market share. Hungryhouse covers 10,000+ restaurants.

Cenkos analyst, Simon French reports that the two companies ‘use similar business models and, as such, are expected to be highly complimentary and offer significant synergy benefits’. This acquisition could lead to the online takeaway platform becoming overly competitive, so one could speculate that this proposal would be blocked by competition regulators.

Implications on Online Food Delivery Services

Companies such as UberEATS and Deliveroo will face less direct competition to others as they target more expensive & chain restaurants in UK cities & provide their own delivery drivers unlike Just Eat & Hungryhouse. Adding to this, the CMA found that Just Eat and Hungryhouse both cover a larger geographic area and provides an online ordering platform for independent restaurants, who deliver the food themselves.

Even though this merger would not severely affect companies with a different focus, it could lead to more UK companies in the same industry selling their assets. As an example, Takeaway.com sold its assets to Just Eat in 2016. The company spokesman, Joris Wilton, stated Takeaway.com’s growth rate in the UK was ‘insufficient to sustain a healthy business’.

Just Eat is growing in size. After considering Takeaway.com’s example, UK online food delivery businesses may not be able to sustain a sufficient growth rate to withstand competitors. To worsen the conditions, the merger between Just Eat & Hungryhouse would lead to an increase in app users and so, more similar companies losing revenue.

This merger might be detrimental to companies, such as Dinner2Go & Domino’s Pizza Group.

DOM DOMINO’S PIZZA GROUP PLC ORD 25/48P Source: LSE

Domino’s Pizza Group’s share price has fallen from 351.2 on 01/12/2016 to 265.8 on 02/08/2017. This plummet is down to a multitude of reasons: the rise in inflation of ingredients is reducing Domino’s profitability, and mobile apps such as Just Eat are increasing in market share. Hence, there is lower confidence in investors.

If the acquisition of Hungryhouse by Just Eat is a success, Domino’s Pizza Group’s revenues may suffer. However, the CMA reported Just Eat does not believe that the acquisition of Hungryhouse would lessen competition in online takeaways in the UK. Hungryhouse is not a main competitor to Just Eat; less than 15% of Hungryhouse restaurant base are ‘unique’ restaurants. Therefore, the merger may not have as much of an impact.

Nevertheless, the fear within investors will not subside and so, the share prices of public listed companies such as Dominos, will fall further if the acquisition occurs.

Implications on Independent Restaurants

However, the CMA is concerned that the loss of competition resulting from the merger between Just Eat & Hungryhouse could lead to more difficult circumstances for restaurants using either company.

If Just Eat becomes a larger competitor, independent restaurants that are not listed on its database will face an unfair amount of competition locally. To support this, the boss of Just Eat revealed in 2016 that the company takes away 100s of underperforming takeaways off its site each year. This might be due to the 12% cut Just Eat takes from every order received, which would most likely increase post merger. Yawar Khan, the chairman of the Asian Catering Federation said:

Once they’ve got you hooked, it becomes very addictive and then they put their fees up.

Therefore, small-scale independent restaurants will face a lot more pressure if the proposed merger follows through. Even though the competition Deliveroo and UberEATS pose on Just Eat may grow over time, it is important to consider other competitors such as alternative online takeaways and small restaurants.

The Predicted Result of the CMA Investigation

After considering the mission of the Competition and Markets Authority (unfair treatment to markets and businesses), the merger is unlikely to be a success due to its implications on restaurants and similar businesses.

Just Eat already has a very large market share, so merging with Hungryhouse would ward off any other competitors, which has been displayed through the falling share price of Domino’s Pizza Group and the lack of similar UK competitors.

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